The Most Important Things You Need to Know About the 5 Areas of Personal Finance

By Myles Leva


Last Updated: August 7, 2023


The world of finance is full of traps, but also opportunities.

The best practices for personal financial planning leave you in a better position to get through hardships. They also ensure you have a more comfortable future, particularly in retirement.

Here are the most important things to keep in mind for personal finance management.


1. Credit & Debt

Don’t Avoid All Debt

Some people pride themselves on never borrowing any money, even by using a credit card.

That’s fine if paying in cash all the time works for you. But if you can even foresee yourself buying a car that isn’t 10+ years old, not to mention a home, avoiding debt like the plague will set you up for a nasty surprise.

The fact of the matter is that you need to take on some kinds of debt to establish your credit history. That can mean using a credit card plus taking very small, safe loans here and there. One good example is setting a strict personal limit while using a cashback rewards credit card. That way, if you don’t miss any payments…

  • You slowly build credit history and increase your score
  • You end up getting paid by your credit card provider
  • You’re in a better position to…

Get a mortgage.

Get an auto loan.

Start a business.


Beware High APRs

Annual percentage rates (APRs) are the main marker for the cost of taking a loan.

High APRs mean your loan is more expensive, and thus normally harder to pay back.

If you decide to take a loan, particularly from alternative lenders, you need to pay close attention to costs. All lenders must state an APR before you sign off on a loan arrangement.



2. Insurance

When You Need Insurance, You Won’t Regret The Cost

When you’re choosing an insurance policy, it makes sense to compare costs. However, it’s normal to end up considering whether you really need the full scope of the coverage you purchased.

What your exact insurance needs are can only be determined by you. For example, if you live somewhere prone to hurricanes, insurance policies should cover the damage they can cause. However, issues like flooding and fires can affect homes everywhere.

The one time you certainly won’t regret paying too much for insurance is the time you actually need it. So, it’s not bad to be a bit overzealous and make sure your insurance policies, for your home, health, vehicles, and otherwise, cover all foreseeable and possible damages.

How Do You Know How Much Insurance You Need & What Kind?


Get All Policies

By the same token, your needs should all be covered. As you get older, in particular, your insurance needs will expand. To be adequately insured, you cannot miss out on any of the following:

  • (Comprehensive) Health insurance
  • Car insurance
  • Home insurance
  • Personal injury and liability insurance (auto)

In some cases, it’s also worth considering:

  • Flight insurance
  • Disease insurance
  • Mortgage life insurance


3. Real Estate

Consider Long-Term Value

For most people, purchasing a home is the most significant financial decision of their lifetimes. But the value of a property is only partially under your control.

Home improvements can increase the market value of your home. But factors such as public school quality, neighborhood amenities, access to major routes and transportation also contribute. While those factors are beyond your control, you can do your background research before closing.


Consider the Homeowners Association

Homeowners associations are the subject of many debates.

Some people like the stability they provide, or their ability to maintain higher property values in a neighborhood. Others find them too imposing, as some homeowners associations set strict rules about things you may not consider important.

Before closing, consider the rules and culture of any local homeowners association. You will likely draw your own strong opinions. You may end up writing them off as too lenient or as too strict. Either way, they are important to consider because of the influence they have on your future as a local homeowner.


4. Taxes

Pay on Time

Much like loans, not paying your tax bill on time will result in penalties and interest charges that can pile up. Left too long, this can quickly spiral out of control.

Hopefully, you’ve never forgone paying taxes on time. If that’s the case, keep it up!


Not All Income is Taxable

Underpaying on taxes can get you in trouble if you’re audited and it looks like you did so intentionally.

However, most mistakes are forgiven and you simply have to pay the outstanding balance.

One other issue that slips by many people is that not all forms of income are taxable. Income includes any money you received during the tax year, but with some notable exceptions which include:

  • Life insurance payouts
  • Corporate income (in some states)
  • Principal residence sales proceeds
  • Gifts up to $15,000 per year

Look up whether the forms of income you’re including in your taxes are actually taxable. It’s important to note that there are also differences from state to state.

In 2018 alone, the IRS sent $464 billion in refunds for people overpaying their taxes.


5. Estate Planning

Don’t Overlook Life Insurance

From a sales perspective, it’s hard to sell something preventative that no one wants to think about.

Your own death is likely one of the things you want to think about as little as possible. But life insurance is about more than that. If you have anyone depending on you in any capacity, it’s more than worth dealing with now.

The good news is that comprehensive life insurance isn’t always expensive. If you don’t engage in very risky activities, it likely won’t be that high. As a tip, you can consider whole life insurance to make sure your premiums don’t rise as you get older.

The 5 Key Components of Estate Planning & Why You Need to Know


Last Will & Testament

This is where you will lay out how your assets should be handled after your death.

Like life insurance, this is something you should consider doing now, regardless of your age.

Your last will covers:

  • Any personal representative who will handle your estate
  • Any trusts or funds you want to have established and dispersed, and under what terms
  • Designation of guardians for dependents



The 5 Areas of Personal Finance

Finance is hard. But understanding the basics of the 5 areas of personal finance can help you no matter what your income is right now. With a few changes, you can make sure you’re getting the most you can out of your personal cash flow.

Photo by on Unsplash

Editor's note: This article was originally published Dec 20, 2021 and has been updated to improve reader experience.


One comment on “The Most Important Things You Need to Know About the 5 Areas of Personal Finance”

  1. I built my home avoiding loans and mortgages. You can set realistic goals on amounts for land and houses and do your own thing - dont break laws but look at the alternatives and go for it. The tiny house movement is one of those popular options that has emerged over the past 10-20 years.

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